Background: The possible role of secretory products of fibrous tissue in the development of hepatocellular carcinoma (HCC) complicating chronic hepatitis C was investigated. Our hypothesis was that gremlin, secreted by fibroblasts, inhibited bone morphogenic protein (BMP), which mediates stem cell maturation into adult functioning hepatocytes, and thus, arrest stem cell maturation and promoted their proliferation in an immature state possibly culminating into development of HCCs. Results: Protein expression of cytokeratin 19 (CK19) and fibroblast growth factor 2 (FGF-2), and mRNA expression of gremlin and BMP-7 were studied in 35 cases of chronic hepatitis, cirrhosis and HCC complicating chronic hepatitis C. CK19 expression was higher in cases of cirrhosis (0.004), which correlated with the grade (r = 0.64, p = 0.009) and stage (r = 0.71, p = 0.001). All HCCs were negative for CK19. Stem cell niche activation (as indicated as a ductular reaction) was highest in cases of cirrhosis (p = 0.001) and correlated with CK19 expression (r = 0.42, p = 0.012), the grade(r = 0.56, p = 0.024) and stage (0.66, p = 0.006). FGF-2 expression was highest in HCCs and correlated with the grade (r = 0.6, p = 0.013), stage (0.72, p = 0.002), CK19 expression (r = 0.71, p = 002) and ductular reaction (0.68, p = 0.004) in hepatitis cases. Higher numbers of cirrhosis cases and HCCs (p = 0.009) showed gremlin expression, which correlated with the stage (r = 0.7, p = 0.002). Gremlin expression correlated with that of CK19 (r = 0.699, p = 0.003) and FGF2 (r = 0.75, p = 0.001) in hepatitis cases. Conclusions: Fibrosis promotes carcinogenesis by fibroblast-secreted gremlin that blocks BMP function and promotes stem cell activation and proliferation as well as possibly HCC development.